document 1 resources and geopolitics...•underestimates long term impact of higher prices, same as...

Resources and Geopolitics

Professor Paul StevensDistinguished Fellow, Chatham HouseProfessor Emeritus, University of DundeeDistinguished Fellow, Institute of Energy Economics, Japan

Second Round Table for studying the energy situationTokyo 29th September

20 mins

Document 1

Chatham House | The Royal Institute of International Affairs 2

Presentation outline (1)

• Questions 1 - 3• Q 1. How do we forecast future changes in supply and demand and consider long-term

price trends from a long-term perspective stretching out to 2050 for crude oil, gas, and coal? What are the important factors in this respect? (I will focus mainly oil and gas)

• Q 2. What are the factors that determine the structural geopolitical changes over the long-term?

• Q 3. What are our views of the geopolitical structural changes in the Middle East? How do they affect Japan’s energy security?

• Problems forecasting long term energy markets• Simultaneity problem

• Price = f(S, D); Demand = f(price); Supply = f (price)• Value of forecasting to 2050? Role of

discontinuities• Trends, bends in trends, discontinuities• Best option to consider the journey, not the end point



• My main narrative: There is a coming “energy transition”

• Transition underestimated by the “energy establishment”

• Within this narrative I will focus on a few specific issues if only to illustrate complexities.• Three technical economic issues

• Is long term oil demand being over stated?• Prospects for oil supply• What is the future of LNG markets?

• Two geopolitical issues• The potential for a renewal of the “cold war”?• Potential serious instability in the MENA region notably

Saudi Arabia?


What is an “energy transition”?

• An economy switches from one major source of energy to another

• Many lessons from history• For example: US 1865-1910; France

1974-90

• An “energy transition” has trigger(s) and reinforcing factors. Key to the process is technical change

• Current “energy transition” is from hydrocarbon molecules to electrons

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United States' primary energy consumption by fuel 1860 ‐ 2000

hydro/nuclear

oil+gas

coal

wood

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100%

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France primary energy consumption 1965‐2015

other

nuclear

coal

gas

oil


The current energy transition

• The main trigger is climate change, Paris and COP21 and the need to decarbonize

• Reinforcing factors:• Falling costs of

renewables• The rise of electric

vehicles

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Million toe

Global primary energy consumption 1965‐2016

renewables

nuclear

coal

gas

oil

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100%

1965

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Global primary energy consumption 1965‐2016

renewables

nuclear

coal

gas

oil


Reinforcing factors?: Falling cost of renewables

• Already started and accelerating

Average auction price 2010‐16 (Irena)


Reinforcing factors?: Electric vehicles (EVs)

• Being underestimated in many “energy establishment” forecasts

• EVs tick all the right boxes• Security of supply• Climate change (given

renewables)• Potential storage for renewable

intermittency

• Clear policies to phase out Internal Combustion Engines (ICEs): France, UK, China, Automobile companies Graph collated by Dan Quiggin, Chatham House


Current “energy transition” underestimated by the “energy establishment”: All very much ‘business as usual’

Why are they ignoring it?

Strong vested interests• IEA’s original agenda

• Safety in numbers

• International Oil Companies (IOCs) face shareholders



• My main narrative theme is a coming “energy transition”• Transition underestimated by the “energy establishment”

• Within the narrative I will focus on a few specific issues to illustrate complexities.• Three technical economic issues

• Is long term oil demand being over stated?• Prospects for oil supply• What is the future of LNG markets?

• Two geopolitical issues• The potential for a renewal of the “cold war”?• Potential serious instability in the MENA region notably

Saudi Arabia?


Technical economic issues: Is long term oil demand being overstated?

• “Energy establishment” typically insists on growing oil demand

• Underestimates long term lagged impact of higher prices: same as the early 1980s• High prices 2004-2014• “OECD disease” …

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2010 2015 2040

mb/d

IEA estimates of oil consumption 2010‐2040

other

power

building

industry

aviation

freight

maritime

Passenger cars

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140

$ 20

16

Oil prices 2000‐2016 (Brent)


Technical economic issues: Which oil prices matter?Product prices are the key to consumption

• “OECD disease”?• Large tax base; inelastic demand =

high tax rates; low collection costs• Price reforms to move to border

prices and collect revenue

• Already started outside the OECD– India 2002, China 2009, and many others

• Makes future crude oil prices less relevant, especially if they are lower – consumer governments will capture the gain

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50

100

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G7 UK

$/b

"OECD disease” 2014Sources of the composite product barrel price

Rest (crude and industrymargin)

Government sales taxes


Technical economic issues: Is long term oil demand being overstated?

• “Energy establishment” typically insists on growing oil demand

• Underestimates long term impact of higher prices, same as the early 1980s• High prices 2004-2014• “OECD disease”

• Technology increasing efficiency• EVs already discussed• Automation• Big data revolution

• But it takes time to change energy the appliance stock

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20

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2010 2015 2040

mb/d

IEA estimates of oil consumption 2010‐2040

other

power

building

industry

aviation

freight

maritime

Passenger cars

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80

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120

140

1990

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$ 20

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Oil prices 2000‐2016 (Brent)


Technical economic issues: Prospects for oil supply• Supply side “Peak oil” is dead.

There is plenty of oil

• Partially thanks to the “shale technology revolution”• But the spread of the

revolution faces barriers outside of the USA• 17 characteristics that explain the

success in the USA

• There is the issue of upstream investment• IOCs face major problems• National oil companies short

of funds

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2000

1996 2006 2016

Global oil production and reserves 1996‐2016

oil reserves (100 bn b) production mn/b/d

https://www.chathamhouse.org/publication/international‐oil‐companies‐death‐old‐business‐model


Technical economic issues: What is the future of LNG markets?

• Impending LNG glut

• BUT ending Qatar’s moratorium (April)creates huge future investment uncertainty in new LNG?• Who would bet against

Qatar?– Break even $2-

$5.2/mnbtu. U.S. Henry Hub (2015 $2.60) +$4-5. Non U.S. $9-12

• An impending LNG supply crunch post 2020?

Global LNG outlook to 2021From Howard Rogers The forthcoming LNG supply wave:A case of crying wolf? OIES Energy Insight 4 2017


Geopolitical issues: The potential for a renewal of the “cold war”?• “Trumpian uncertainty”

• “Cold war” created patrons and client states most obviously in MENA = war by proxy

• China and concerns over security of oil supplies

• General incentive for energy “self-sufficiency” promotes energy supply


Geopolitical issues: Serious instability in the Middle East?

• Region already very unstable• Back to 1918

• There is the possibility of more instability• Growing economic discontent in

MENA region• Failure of the “Arab Uprisings” of

2011 – causes not gone away!• “Trumpian uncertainty” and Iran

• More instability means a new geopolitically driven oil price shock• consumer governments likely to

argue “enough is enough”, let’s move away from oil

• A reinforcing factor for the “energy transition”

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US$

per

bar

rel

Source: Ali Aissaoui , 2014

OPEC Budgetary Break-Even Price 2014


Geopolitical issues: Serious potential instability in in Saudi Arabia?

• Domestic economy• Running low on funds?• Poor employment prospects• Failure to diversify: no

“perestroika” (economic liberalization) without “glasnost” (political liberalization)

• Internal dissent and family arguments

• Religious pressure• Militant Sunni Islamist• Domestic Shi’a unrest: Awamiya


Main messages

• Not enough attention given to a coming energy transition which is happening and will accelerate

• Future oil demand being overstated

• Future oil supply not a problem – eventually

• Future for LNG uncertain

• Middle East presents serious threats to oil supply and prices

• The prospects for Saudi Arabia are very uncertain

THANK YOU FOR YOUR ATTENTION

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